Jumbo loan limits won't shrink in '07

Good news today for people who will be looking for a mortgage in 2007. There's no fear that falling home prices will force more home buyers into higher-priced "jumbo" mortgages. Why would falling prices drive up the interest rate? Because only loans for amounts below the government-set jumbo threshold qualify for the cheaper financing made available through Fannie Mae and Freddie Mac. Normally, that threshold rises each year to account for rising home prices. But since home prices have fallen so far this year, there's a very good chance the government would be in the unusual position of lowering the jumbo threshold for 2007, thus driving more borrowers into higher-priced loans. To avoid disrupting the mortgage market, the regulators have decided that even if a lower threshold is warranted for 2007, they will keep the current limit of $417,000 in effect through 2007. That means buyers close to the current cutoff point don't have to rush to the closing table to wrap up their deals.

The announcement came this afternoon from the Office of Federal Housing Enterprise Oversight (OFHEO), which is the regulator for Fannie Mae and Freddie Mac, the two government-founded but shareholder-owned corporations that buy mortgages from lenders and repackage them as securities for sale to investors all over the world. Fannie and Freddie are allowed to buy only mortgages up to that government-set loan limit, and they tend to carry interest rates that are between 1/8 to 3/8 percentage point cheaper than larger, jumbo loans.

Next year at this time, OFHEO plans to even out the accounting. If home prices rise between October, 2006, and October, 2007, any decrease in the loan limit deferred from this year would be subtracted from the increase in the loan limit that would have been authorized for 2008. But if prices were to decline for a second year, the loan limit for 2008 would be cut by at least what would have been called for in 2007.